Bank of America is being pushed out of the Dow Jones Industrial Average in
favour of Goldman Sachs, under the index’s biggest shakeup in nearly a
decade.

Hewlett-Packard, the struggling technology giant, and aluminium producer Alcoa have also lost their places in the blue-chip index, to be replaced by Visa and Nike respectively.

The S&P Dow Jones Indices Committee, the five-person group responsible for curating the Dow Jones Industrial Average, said it wanted to strip out stocks whose prices had fallen so low, they no longer made a meaningful difference to the index.

“[The changes] will make the Dow a better index and a better measure of what is going in the stock markets. It is about keeping it really blue chip stocks which is the tradition of the Dow – 30 really blue chip, solid American companies," said David Blitzer, committee chairman and managing director of S&P Dow Jones.

“Low-priced stock have little impact...These three companies together had a weighting of 3pc in the Dow so their impact was quite small. We had a few stocks at the top which carried a huge weight so we tried to redress that.”

HP, the most valuable of the three stocks being stripped out of the Dow, opened at $22.07 a share on Tuesday - less than a third of Nike's opening price of $66.70. Meanwhile, Visa and Goldman Sachs shares began trading at $182.41 and $162.98 respectively.

Related Articles

The committee said the changes were also designed to ensure the index reflected a diverse range of industries. The financial sector will have more impact on the Dow Jones than in the past, because Goldman’s share price is so much higher than Bank of America’s, whilst the addition of Nike to the Dow will increase its exposure to discretionary spending.

However, the shake-up comes as a blow to Bank of America, H-P and Alcoa, by underscoring the decline in their share prices over the last few years. None of the institutions was warned about the decision before it was made public.

Goldman, Visa and Nike shares all rose on the news of their inclusion, despite the committee’s warning to investors that they should not interpret it as an endorsement.

“There is no intention to pick winners, by any means. Adding a stock or dropping a stock is not a recommendation by any means,” said Mr Blitzer. He added that certain hugely valuable stocks, such as Apple and Google, are excluded from the index because they are so big they would skew the figures.

The indices committee has been mulling the changes for two years, and once considered swapping out as many as eight stocks. “Everyone baulked at that as a little dramatic,” Mr Blitzer said.

The three-for-three shake-up announced on Tuesday will come into effect after the market closes on Friday 20th September, ready for the start of trading on 23rd September. The Dow Jones Industrial Average was last changed in 2009, but there has not been a swap of this scale since 2004.

The Telegraph Investor

Editor's comment:

Priced to be great value for new investors and those with large portfolios.